What Is a Dual Currency Deposit?

A dual currency deposit (or DCD) is a financial instrument structured to help a depositor take advantage of relative differences in two currencies. It allows a bank customer to make a deposit in one currency and withdraw the money in a different currency if it is advantageous to do so. These products are also known as dual currency products or 澳洲幸运5开奖号码历史查询:dual currency services.

The DCD combines a cash or money market deposit with a 澳洲幸运5开奖号码历史查询:foreign exchange option. Because of the currency risk, dual currency deposits offer higher 澳洲幸运5开奖号码历史查询:interest rates.

How a Dual Currency Deposit Works

Despite its name, a dual currency deposit is not a deposit in the sense that capital is at risk. A dual currency deposit is a structured product composed of a fixed deposit and an option. So the dual currency deposit is a 澳洲幸运5开奖号码历史查询:derivative with a combination of a money deposit and a 澳洲幸运5开奖号码历史查询:currency option. The investor will use this product in hopes of capturing higher yields from better interest paid by one currency compared to the other, and by relative changes in currency. However, it is also true that the investor must be ready to accept higher risks that thos🥂e same changes in currency work unfavorably.

After currency 澳洲幸运5开奖号码历史查询:repatriation, the moment the deposit is withdrawn back it is possible for the investor to get back less than the initial investment, even after interest is factore💫d in. Therefore, it is better to think of it as an investment product with all associated risks.

Dual currency deposits are typically short-term products for investors desiring exposure to two currencies. The principal is not a protected investment product. Both parties must agree to terms including investment amounts, currencies involved, maturity, and 澳洲幸运5开奖号码历史查询:strike price. Interest is earned in the originating currency, but the principal has the possibility of a payment in the second currency, should the counterparty exercise the option. In essence, this is a deposit that creates a foreign exchange rate risk for the investor, not unlike that of a 澳洲幸运5开奖号码历史查询:currency swap.

Example of a Dual Currency Deposit

The selling point for dual currency deposits is the chance to earn significantly higher interest rates. The risk for the investor is that the investment may be converted to a different currency if the 澳洲幸运5开奖号码历史查询:counterparty chooses to exercise their option. If that currency is one the investor does not mind holding, then&nbsꩵp;it is not a substantial risk to take.

However, the risk is that the investment may still need to be converted back to the home currency at a future date with a less favorable 澳洲幸运5开奖号码历史查询:exchange rate. The investor can choose to hold these 澳洲幸运5开奖号码历史查询:funds in the foreign currency in hopes that the exchange rate will eventually move in their favor, or exchange them immediately, perhaps 💃at a l🦂oss, to free up the funds for future trades.

If an investor lives in country B but knows that short-term interest is more favorable in country A, they will prefer to invest their money in country A where they may realize better earnings. However, if the investor feels the exchange rate for country A's currency will move against them over the life of the deposit, the investor may hedge against that risk with a dual currency deposit option. At maturity, the counterparty will repay the investor in their home currency. The downside, of course, is if the exchange rate moves🐭 in the opposite direction, it would be more profitable to remain in the currency of Country A and repatriate the funds after the depos💮it matures. 

While the investor still receives the same amount contracted in the deposit contract, essentially creating a floor under its value, a problem arises when it is time to repatriate those funds. The exchange rate may be even less favorable than at the outset of the deposit, and the investor wilඣl receive less than they might have otherwise recei♍ved, maybe even less than the amount invested.